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MUMBAI/NEW DELHI: With its IPO plans on the backburner, India's largest homegrown handset vendor Micromax is exploring several strategic options. This includes selling a significant minority stake in the company with a clear milestone-linked roadmap for a change of control in the future, said multiple sources aware of the plans. However, the promoters of the company are equally open to an outright sale of the business right now, provided valuation expectations are met, said the people cited above. None of them wanted to be identified.

Goldman Sachs is said to be advising Micromax to explore these options. Feelers have gone out to several Asian technology and communications companies including Chinese ecommerce company Alibaba. the world's largest e-tailer, and Japanese communications giant Softbank. Meetings overseas have taken place to this effect, the sources said.

The promoters of Micromax are seeking a valuation of $3-3.5 billion or as much as Rs 21,000 crore which is 2.5-2.9 times FY14 total income of Rs 7142 crore ($1.1 billion), according to Registrar of Companies (RoC) filings. It posted EBITDA of Rs 439 crore and profit after tax of Rs 284 crore that year.

A transaction would give bumper exits to private equity and financial investors like TA Associates which came on board five years ago and currently own 15% of the company. They are also believed to be nudging the management to explore strategic options, according to a source involved. Micromax was valued at around Rs1,500 crore when TA invested in 2010, paying around Rs 225 crore.

Sequoia Capital and Sandstone Capital own 2.68% each while Madison India Capital controls around 0.4%. In 2012, China's Spreadtrum Communications, a fab-less semiconductor provider invested $10 million for a minority stake. The four founder promoters -- Rahul Sharma, Rajesh Agarwal, Sumeet Kumar and Vikas Jain-- set up Micromax in 2000 as a supplier of parts to Nokia. It then became hugely successful with affordable but feature-rich branded handsets. They own a little less than 80% of the company. Last year, Micromax hired former Bharti Airtel CEO Sanjay Kapoor, Samsung India mobile head Vineet Taneja and Bharti Airtel veteran Badal Bagri to power growth and build a bigger brand before an IPO.

Until late 2014, the IPO plan was being vigorously pursued and the company had received pitches from several investment banks including Goldman, Morgan Stanley and Citi. But that thinking appears to have changed. "A stake sale of at least 26% now will also have a clear roadmap to a change of control. This will be a strategic and not a financial investor. You need a professional management to run the company during transition or even afterwards. But the promoters are also exploring selling out completely provided they get their premium," said one of those cited above. "For the last few years, the founding promoters have taken a backseat and have allowed Kapoor and his team of senior professionals to run the operations for them."

A Micromax spokesperson declined to comment. A Goldman Sachs spokesperson also declined to comment. An Alibaba spokesperson said, "As a matter of company policy we do not comment on rumours and speculation." There was no response to mails sent to Softbank and TA Associates on Friday as of press.

Home Grown success

From its humble beginnings, Micromax is currently the undisputed No. 2 player in the market to Samsung. With a monthly sale of 3 million handsets -- of which smartphones account for around 45% -- most expect it to surpass competition and bag the top slot in the coming months, although some rankings put it ahead already. Its ability to introduce new devices at very affordable price points and focus on aggressive branding and advertising helped it grow into a billion dollar plus entity. It was the first handset vendor to introduce a 30-day battery recharge phones and the dual SIM phones in the country. Riding on the mobile revolution, Microamx has grown at a scorching pace. For example, RoC data shows, in between FY' 08 till FY '14, its topline has grown a whopping 5480% and its PAT by 1710%. The company ventured into handset making only in 2008 when it was an also ran in a market that was dominated by Nokia and Blackberry.

Having established itself in India, the company has moved into Russia and is planning further overseas expansion. However, sources said that previous estimates of a much higher valuation for Micromax for an IPO were optimistic since the company, like most other local handset makers, doesn't add much value to a handset being imported from places like China and Taiwan. Aware of its limitations of being just an assembler and a trade player, Micromax, under Kapoor has also being trying to morph itself and build a technology and app-eco-system around its core hardware strategy. Previously, it had also explored raising around $100 million of new money from investors, solely for its technology play. This has been a perceptible change that Micromax wants to bring by investing in R&D and local manufacturing.

Investments in R&D facilities to develop different user interfaces is also becoming critical as hardware components of smartphones are increasingly becoming commoditized. Local vendors like Micromax have had to develop different user interfaces to try and differentiate their products and increase market share in an extremely competitive handset market.

"That's exactly why the promoters are willing to cash out when the going is good. This is a segment where overnight companies can just melt and technologies get outdated. Examples of Nokia or Blackberry are for all to see," said one of those cited above.

Technology Interplays

Traditionally Micromax devices are built around the Android operating system, but the company recently entered into an exclusive partnership with US-based operating system maker Cyanogen for making CyanogenMod, the OS base on its new devices under the Yureka brand. This new operating system is used by over 50 million devices across 250 smartphone models. The company has claimed that Cyanogen may well be a challenger to the dominant Android OS.

Interestingly, earlier this month, Alibaba bought an unspecified minority stake in a Chinese handset maker Meizu Technology Co for $590 million. The deal would enable the e-commerce giant to push for adoption of its homegrown operating system YunOS thought the smartphone maker, as it seeks for ways to expand its presence in related technology sectors. Privately owned Meizu currently has a minuscule 2% share of China's smartphone market, the largest in the world. Sources say that Micromax which has been trying to expand and adopt new operating system, could provide a significant platform for Alibaba to expand the adoption of its own operating system beyond Chinese borders. Alibaba made its India debut by writing a $550 million cheque for a strategic stake in leading m-commerce player Paytm.

Softbank has been the biggest backer of Indian internet and technology companies and has plans to invest $10 billion in the next few years. Till date it has already put in over a billion dollars to prop companies as diverse as Snapdeal and Housing.com to online taxi aggregator Ola Cabs. In November 2014, Bharti SoftBank, a joint venture between Bharti Enterprises and SoftBank Corp, acquired 36.5 per cent stake in ScoopWhoop, an India-focused media start-up, for an undisclosed amount. Brighstar Corp - another Softbank owned company -- last year bought controlling stake in Beetel Teletech, a Bharti Enterprises' group entity engaged in distribution and sale of communication and media devices, enterprise solutions and IT products.

"Global investors are eyeing the real estate that comes with hardware like Micromax. As more and more buying and selling moves to mobile platforms, many of the etailers or the tech-communications players see a huge upside if they actually own the handset eco-system as well. They can customize apps and other services to push sales on their platforms. Big handset makers like Micromax can help them leverage that immensly," explained another official.

Also with manufacturing costs rising in China, device makers are increasingly looking at India to set up manufacturing units. Last month the Uttar Pradesh government signed agreements worth Rs 3,000 crore with Samsung, Lava, Spice group and Pacetel to establish/expand their manufacturing base within the state.

What has further helped in attracting interest from both Indian as well as foreign manufacturers is the government's Make in India initiative which through various schemes, aggressively seeks to replace India's status as a net importer of electronics hardware to a major exporter in years to come.